What Is a Cap Table? A Guide for Startup Founders

Startup founders, it seems safe to say, have a bias toward building things. But it’s the rare founder who thrills at the challenge of building that one thing a growing startup needs most: a capitalization table. This is understandable. Even in a company’s earliest stages, it can be overwhelming to step back and take account of which shareholder owns what. 

But a capitalization table—or cap table, for short—is not a thing to be feared. Sure, it sounds like a lot of work to put down in writing a comprehensive account of your company’s equity ownership, but all that work can lead to some pretty great outcomes. A strong cap table helps your CFO and other executives make agile decisions, keeps your employees happy and motivated, and gives potential investors the information they need to bet on your business. 

In this article, we’ll review everything a startup founder needs to know about cap tables—from what they are and how they work, to how to manage a cap table as your company grows from seedling to pre-IPO unicorn. We’ll also review a few different types of cap tables and discuss some common cap table mistakes we’ve seen founders make.

• What is a cap table?
• The different types of cap tables: Spreadsheet vs. software
• How to read a cap table
• How is a cap table different from a balance sheet?
• Why do I need a cap table?
• Who creates a cap table?
• How to create a strong cap table: 3 tips for startup founders
• 8 common cap table mistakes (and how to avoid them)
• Managing your cap table as your company grows

What is a cap table?

A cap table is a table that tracks the equity ownership of your company’s stakeholders. These shareholders will likely include yourself (the founder), other founders or members of your executive team, your employees, and any outside investors who have an ownership stake in your company.

Just as a cap table lists out all of the shareholders and other equity holders, it also lists out all the different types of equity those shareholders hold. For example: As a founder you may hold a certain number of shares of common stock or preferred stock, and those shares would be listed under your name in a cap table. Your employees may hold a number of stock options, and those would be listed under each of their names. And so on and so forth.

The point of a cap table, to be clear, is to provide a clear breakdown of how the ownership of your company is dispersed among its various stakeholders. This accuracy of this breakdown is important, not only for your current investors and shareholders, but for any prospective investors who need to understand how equity is diluted and dispersed at your company. 

The different types of cap tables: Spreadsheet vs. software

There are a few different types of cap table solutions you may consider as a founder. We’ll start by discussing the most basic option available — the spreadsheet — and then move on to the pros and cons of different software options. 

Note that different options may make sense for your company at different stages of growth, but many companies progress through the following three options in a linear fashion.

The cap table spreadsheet

The most basic cap table is a spreadsheet or table that lists all the different types of equity owned by stakeholders in your company, along with who owns what. If you want to go this route, you don’t have to start from scratch — Pulley offers a free cap table template with all the basic information you’ll need to get started.

Just beware that spreadsheets have their limits, and sticking with a spreadsheet for too long is one of the mistakes we see founders make all too often. Spreadsheets aren’t great at scaling and are prone to human error. To avoid costly mistakes that may turn away investors, you’ll need to limit edit controls to a small group of people and be sure to update your spreadsheet as your equity situation changes. If this sounds like a pain, you might want to consider our next option instead.

Free cap table software

We generally think that cap table management software is a superior solution to a spreadsheet—even for startups that may not have a super-complex equity picture at the moment. Cap table software offers features and controls that can give you real-time visibility into your equity ownership. It’s also great for investors who need a clear, real-time picture of your company’s equity situation before deciding whether to invest.

Many equity management platforms offer free cap table management tools for startups below a certain size. Pulley, for example, offers a free Seed plan for new customers with less than 25 stakeholders and less than $1M raised. This comes not only with cap table management, but with other features such as the Fundraiser Modeler, option and equity templates, and more.

Paid or premium cap table management software

As your startup grows, you’ll likely need to fulfill more equity-related requirements such as a 409A valuation. You may also want to integrate your equity tools with your other platforms and take advantage of more complex tax and compliance features that help you avoid errors in Rule 701 compliance, 83(b) status tracking, and more. 

If you’ve already gone through the trouble of onboarding a free software solution, the good news is that many free solutions offer seamless upgrades to paid or premium plans. This makes it even more important to do your due diligence in shopping for a great cap table solution from the start, as ideally you’ll want to settle on one that scales with your business as it grows.

How to read a cap table

The earliest version of a private company’s cap table is likely just a spreadsheet. There’s no one-size-fits-all way to build a spreadsheet cap table, but it typically incorporates a few essential pieces of information: 

• The name of each shareholder, exactly as it appears on the stock certificate or other security instrument.
• The type of equity owned by each shareholder, i.e. common shares, Series A preferred stock, employee stock options, warrants, etc.  
• The amount of equity owned by each shareholder, typically in number of shares or units
• The date the equity was granted or issued
• The total number of fully diluted shares for each shareholder, i.e. the total number of shares that have actually been issued plus any shares that remain in the option pool and thus may one day belong to that shareholder. Note that the fully diluted number is denominated in common shares. Preferred shares are sometimes converted into common shares based on a conversion ratio (for example: one preferred share = three common shares). This makes it easy to compare equity between stakeholders who may hold different equity types.

These elements are ideally organized in a way that’s easy to read. Keep in mind that a strong and well-maintained cap table will probably have quite a bit more information and commentary in it as well, but these are really the bare essentials in terms of the information you need to get across.

If you want to see what a basic cap table looks like in action, check out this cap table example for the company Acme Incorporated.

Common equity types found in cap tables

If you’ve gone through a number of funding rounds, you probably already know that equity can get confusing pretty quickly. There are a lot of types of equity! Here’s a quick breakdown of some of the more common types you might see represented in a typical cap table:

• Common stock: As its name implies, this is probably the simplest form of equity to wrap your head around. Owning a share of common stock means you own a share of the company itself. The ownership percentage each share represents (and what rights the owner is entitled to) depends on a number of factors, such as the total number of shares and the company’s corporate charter.  
• Preferred stock: This is a different type of stock that comes with different rights and privileges than common stock. Preferred stock usually doesn’t come with the same voting rights as common stock, but a preferred stockholder is typically the first to be paid out in terms of dividends or in the case of a liquidity event. Sometimes preferred stock is classified as “convertible,” which means it can be converted to common stock if specific circumstances are met.
• Employee stock options: Stock option grants are a type of compensation that allows (but doesn’t obligate) the employee to purchase a number of shares of common stock at a fixed exercise price. Stock option plans are historically the most prevalent form of equity-based compensation for employees.
• Restricted stock units (RSUs): RSUs are another type of employee compensation that converts into common stock when, for example, time restrictions and a liquidity event condition are met. In a separate guide, we’ve broken down the key differences between stock options and RSUs.
• Restricted stock awards (RSAs): RSAs are awards of company stock. Like RSUs, RSAs typically come with a vesting period, during which time the recipient’s rights to the stock are restricted. Unlike RSUs, RSA shares legally belong to the holder, so vesting is typically more about a company’s rights to repurchase shares in the event of the holder leaving or being fired.
• Warrants: Kind of like a stock option, a warrant grants the owner the right (but not the obligation) to purchase a number of shares of stock at a future date at a fixed exercise price. It’s pretty uncommon for employees to be granted warrants, though investors can trade or buy them over-the-counter.
• Convertible notes and SAFEs: Convertible notes, also known as convertible promissory notes, are short-term debt instruments oftentimes used in seed financing and venture capital. A SAFE is an agreement that an early-stage startup makes with an investor. Like a convertible note, a SAFE is a type of convertible security. Also like a convertible note, it aims to solve the issue of a startup not having a formal valuation nor shares to issue to the investor. Read about the difference between SAFEs and convertible notes.

Other types and permutations of equity exist, and the above list is by no means exhaustive. But it’s a good starting place for understanding the various equity elements represented in a typical cap table.

Other key terms: Pre-money valuation vs. post-money valuation 

Besides knowing the types of securities you’ll come across in a cap table, you should familiarize yourself with how valuation is defined in a cap table. The short answer is that valuation is typically represented in two general ways: pre-money valuation and post-money valuation.

A company’s “valuation” isn’t simply one magical, irrefutable number; it can be different depending on when and how it is valued. 

The pre-money valuation is the valuation that’s calculated before outside equity investments are factored in. It’s meant to help investors understand how much your company is currently worth—and, indeed, sometimes investors will propose their own pre-money valuation for your company as a basis for fundraising talks.

The post-money valuation is how much a company is valued after additional investments are accounted for. This figure is important to investors because it helps them understand how much equity they own after they invest their money in your company. You can find it with a straightforward calculation: pre-money valuation + investments = post-money valuation.  

How is a cap table different from a balance sheet?

A cap table is not the same thing as a balance sheet, but you can be forgiven for confusing the two. 

Long story short, a balance sheet is an accounting of the balance of your company’s assets and liabilities, while a cap table focuses more on who owns what part of the company. The balance sheet focuses on the business side of things, while the cap table focuses on the equity ownership side of things.

Again, the two are related and perhaps equally essential in understanding your company’s financial outlook, but they are not the same thing.

Why do I need a cap table?

Like any good founder/entrepreneur, you need a cap table because you need to be as intelligent as possible about the business you’re running. A cap table is a way of taking something that can seem pretty complicated and opaque—i.e. all the intricate ways in which the ownership of your company breaks down—and turning it into a clear, legible tool for making business decisions.

Are you planning on hiring the best talent out there? Then you need to know many stock options you can offer to hire and retain that talent. 

Are you shopping around for new investors? Then you’ll need a cap table that’s in a good state so any potential investors can quickly do their due diligence and close on a deal. 

A broken or out-of-date cap table can lead to confusion over equity packages and unhelpful disparities in employee compensation. Take the time to get it right at the outset, and you’ll thank yourself for the lack of a headache later. 

Who creates a cap table?

Who you entrust to create and manage your cap table may depend on the stage of your company. In any case, it may not be the best idea to pop open a Google Sheet and go to town on it yourself. Cap tables have a tendency to get super-complicated super-quickly, and that’s before you even get into all the legal documents.

So, first things first: Involve your lawyer and/or accountant in the process. But even if your company is tiny and you don’t have a ton of resources at your disposal, you have some great options to help you out. 

Like Pulley, for example. Our flexible plans make it easy to manage cap tables, regardless of your company’s size. Even our Startup plan for  budget-conscious and scrappy startups comes with all the tools and integrations you need for effective cap table management.

How to create a strong cap table: 3 tips for startup founders

To wrap up, let’s consolidate some of our favorite tips for startup founders embarking on their first cap table adventure:

1. Don’t try to do it all yourself

You have a lot on your plate, and a cap table is definitely not the place to cut corners. If you’re anticipating rapid growth in the coming months and years, you might want to get your cap table strategy in place now. Depend on a team of trusted lawyers and accountants to help manage and audit your cap table, and maybe don’t take this as an opportunity to dust off your own Excel skills. 

2. Use an equity management platform

There’s a lot of power in using cap table software that’s built for this kind of thing. A platform like Pulley not only makes it easy to read and understand your cap table, but it can help you avoid costly tax and legal mistakes with compliance features such as automated error checking.

3. Update your cap table on a regular basis 

A cap table is no good to anyone if it’s out of date. Put the right people in charge of managing yours so you can rely on it to make up-to-the-minute business, hiring, and investment decisions.

8 common cap table mistakes (and how to avoid them)

We’ve seen founders make a lot of mistakes when it comes to setting up and maintaining their company’s cap table. This is totally expected! Founders got to where they are by building companies, not by keeping an eagle eye on equity ownership. With that said, here are the top mistakes we see founders make time and time again —and how you can avoid doing the same.

1. Sticking with the spreadsheet beyond the early days

The temptation of Excel is real, especially for those of us who appreciate the soothing beauty of spreadsheet formulas. (OK, maybe that’s just us.) And, for a while at least, a spreadsheet cap table can be a perfectly fine solution. If the only stakeholders are you, your co-founder, and a few friends or family members, it’s hard to argue against the simplicity of a spreadsheet. Pulley even offers a free cap table template for founders who are just starting out and need to get their equity situation sorted out in short order.

But sticking with a spreadsheet beyond a certain point is a mistake. As you begin to court angel investors and private equity firms in your company’s seed rounds, you’ll start to see where spreadsheets come up short. For one, they don’t offer flexible tools and features that grow with your business in real-time, such as fundraising modeling, advanced admin controls, and tax compliance backstops. Secondly, they’re difficult to maintain and prone to multiplication. Which brings us to our next point… 

2. Maintaining multiple cap tables vs. a single source of truth

One of the major disadvantages of working with spreadsheets is human error. Spreadsheets are prone to duplication, as people may save a file on their computer and fail to sync it with the “master” file when adding new information. In terms of compliance, visibility, and investor trustworthiness, this is not good!

The whole point of a cap table is to provide a clear and accurate overview of your company’s equity ownership. If you don’t have a single source of truth, this is all but impossible. The good news is that cap table software like Pulley gives you real-time visibility into your ownership, as well as views that can be shared (but not edited) by employees and other stakeholders.

3. Not taking the time to find a good law firm

Partnering with a reputable law firm such as Cooley to manage your cap table is a smart decision. These law firms are often laser-focused on the tax and compliance issues that typically face early-stage startups, which should give you peace of mind as you grow your business. Even better, many law firm partners can grow with you as your company grows, helping you to perform audit-ready 409A valuations and other necessary tasks associated with equity management. 

Pulley has partnered with Cooley to help you manage your cap table and track your equity, with onboarding available in as short as one week.

4. Splurging on software features you’re not ready to use

As you shop around for the best cap table management software for your startup, keep in mind that you aren’t just shopping between providers. You’re also shopping between plans. Some providers offer plans that make sense for companies with different levels of complexity and different numbers of stakeholders. 

You can save money and stress by considering which tools and features you actually need, and which you can afford to upgrade to at a later date. Do you really need to pay for a waterfall analysis tool if you’re still years away from a liquidity event such as an acquisition or an IPO? We’d say no.

The good news is that many cap table solutions offer plans with pricing designed to grow with your business.

5. Choosing software that’s too complicated to use 

It’s tempting to prioritize bells and whistles over ease of use. But if you’re thinking too much about future use cases and not enough about your own current use case, you could be in for a headache. 

The best cap-table software isn’t always the software with the most features. For startup founders who need to manage their own cap tables, simplicity can be an asset. Find cap-table software that’s founder-friendly, easy to navigate, and doesn’t require a law degree to manage. Not only will his save you time now, but it will make onboarding future executives, lawyers, and employees less of a concern.

6. Forgetting where your employees fit into the picture 

Speaking of getting your team’s buy-in, don’t forget about your (future) employees! Great cap table software should come with employee views, tools, and calculators that make it easier for your employees to quickly see and understand their equity grants. 

It should also come with features that make signing option grants and offer letters feel like a personalized, boutique experience. Pulley, for example, skips the need for DocuSign and allows employers and employees to send, sign, and record equity agreements all in one place.

7. Not planning with the future in mind

If you’re looking to go public via an IPO someday, you should start planning for it today. If that sounds premature, consider the cost and hassle of switching to a new cap management tool years down the line, all because your current tool doesn’t offer all the stuff you need. 

So, even if you aren’t quite ready for it, it’s a good idea to go with software that will allow you to model scenarios and simulate payouts for every stakeholder on your cap table in the event of an acquisition or IPO. The same goes for tax and compliance issues that you may not face now but will likely encounter in the long run. Pulley is a great solution in this case, as we have plans that scale with your company from the Seed to Startup to Growth stage.

8. Over-dilution of shares 

Share dilution happens when a company does something to increase its number of shares outstanding. Increasing the number of shares means decreasing, or diluting, the ownership stake represented by each individual share. This can be a problem for founders and existing shareholders, as well as for potential investors. 

Founders who don’t keep an eye on their cap table and agree to over-dilute their shares in the early fundraising rounds are set up for trouble. Not only will their equity likely be worth less in the long run, but investors may interpret their relatively low percentage of equity ownership as a sign that they may bail before the company reaches later stages of growth.

Managing your cap table as your company grows

Managing your cap table isn’t a set-it-and-forget-it type of deal. But you already knew that. We know it, too, which is why Pulley offers plans that scale up as your business grows. 

With plans and pricing designed to scale alongside your business, Pulley can quickly adapt to keep pace with your company’s shifting needs. Which leaves you more time to focus on taking your company to the next level. Now, how does that sound?